Disclosure is a process of giving information to another person. In franchising, all franchisors must create and maintain a disclosure document. This document must be given to potential and current franchisees.
The disclosure document is supposed to help potential franchisees make a reasonably informed decision about the franchise.
The disclosure document must give useful and reliable information about the franchise. It also gives franchisees current information about the franchise that they need for the running of their business.
The disclosure document needs to be updated each year. But, to keep franchisees informed, franchisors have to do more than update their disclosure document once a year.
Annual update to a disclosure document
Within 4 months after the franchisor’s financial year has ended, the franchisor must update their disclosure document to reflect changes that occurred in the previous 12 months. For example, franchisors whose financial year ends on 30 June have until 31 October that year to update their disclosure document.
Unless a franchisor receives a written request from a franchisee, they are not required to update the disclosure document if they:
- entered into only one or no franchise agreements during the last financial year
- don’t intend to enter into a franchise agreement in the upcoming financial year.
Other times when a disclosure document must be updated
Franchisors must update their disclosure document at other times.
- Disclosure documents must not contain information that will, or is likely to, mislead or deceive. This means that if a significant change in the franchise system occurs, the franchisor must consider if their disclosure document needs to be updated to reflect this change. This is required even if the annual update is not yet required.
- Under the code, certain information called materially relevant facts is considered so important that the franchisor cannot delay telling franchisees and potential franchisees about it. They can't wait until the next time they update the disclosure document.
A disclosure document must be in the same format and contain the information listed in Annexure 1 of the code, including:
- supply restrictions and rebates (watch the ACCC video on supplier restrictions)
- future capital expenditure that franchisees may have to pay for
- costs of setting up and running the franchise
- whether the franchisor is solvent
- contact details for current and former franchisees
- legal action against the franchisor to do with franchising.
If a disclosure document contains information about capital expenditure, the franchisor must speak to potential and current franchisees about the capital expenditure. This discussion must happen before entering into, renewing or extending a franchise agreement.
A franchisor must usually give a potential franchisee a copy of their disclosure document at least 14 days before: the franchisee:
- enters into the franchise agreement, or
- makes a non-refundable payment.
If you are thinking about buying a franchise, make sure you have enough time to understand what the disclosure document tells you. Also get independent advice. We explain more about disclosure documents and what they tell you in our online franchising course.
An existing franchisee can ask the franchisor for a copy of the disclosure document once every 12 months.